Why Capital Gains Taxes Should Be Lower than Income Tax Rates

A few posts ago in Not Doing a Good Job of Taxing the Rich, I talked about how raising income tax rates would not cause people like Warren Buffett to pay more because most of his wealth is in the form of capital gains from his investment in Berkshire Hathaway and his income from dividends, both of which are not taxed at the standard income tax rate. With Mitt Romney saying that most of his income was from capital gains, and therefore taxed at 15%, there has been quite a lot of talk about why he and other wealthy people are paying a lower rate than everyone else. Why not raise capital gains taxes to 30%, or just have gains count as regular income?

One reason often given, which certainly has validity, is that encouraging people to invest their money helps the economy. Certainly the availability of investment capital helps to create…

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